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House Republicans Take an Axe to the Obamacare Mandate

House republicans announce their plan to repeal and replace the Affordable Care Act this week.

Donald Trump's promise to repeal Obamacare and its individual mandate took steps forward this week when republicans in the House of Representatives unveiled their replacement plan. The GOP plan is significantly different than the Affordable Care Act, so let's take a closer look at how it would work.

Some background

Obamacare successfully reduced the uninsured rate in America, but it's been panned for failing to curb runaway increases in insurance premiums and deductibles. The mandate requiring all Americans to have healthcare insurance has also been a big sticking point with conservatives, who believe that decision should be up to the individual.

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As a refresher, the Affordable Care Act created state marketplaces through which uninsured Americans could select insurance plans of varying coverage. Bronze level plans are the lowest-cost plans available on these exchanges, but they provide limited healthcare coverage. Silver level plans are more expensive, but they provide more coverage, and they've proven to be the most popular plans. Gold and platinum level plans are also available, but they cost the most, and as a result, they're less popular.

People earning income that is below four times the poverty level receive subsidies that significantly reduce their monthly insurance premiums. Overall, about 8 in 10 people enrolling in Obamacare plans receive subsidies that reduce their premiums to about $100 per month.

In order to ensure insurance patient pools aren't comprised solely of sick, and therefore high-cost members, Obamacare included a provision that mandates all Americans get insurance, or face a penalty at tax time. The penalty has steadily increased since Obamacare's launch, and currently, it stands at $695 per adult, or $347.50 per child, per person, up to a maximum $2,085 for a family.

Although the individual mandate was designed to boost the number of healthy people signing up for health insurance, insurers have struggled to turn a profit on plans sold on the Affordable Care Act's exchanges.

In 2016, losses on Obamacare plans prompted UnitedHealth Group, the nation's biggest health insurer, to exit the majority of its ACA markets in 2017. Similarly, Humana and Aetna also decided to reduce their exposure to the exchanges because of losses. Because of these decisions, people in some counties were left with only one or two insurance options this year, prompting steep criticism. Insurers that chose to remain in the exchanges this year were forced to increase their premiums, drawing additional ire from patients and Obamacare critics.

A new approach to health insurance

Instead of mandating that Americans must buy health insurance, the GOP plan would provide refundable tax credits that it believes will entice people to enroll, without the threat of a bigger tax bite.

People who are younger will receive a smaller tax credit than older Americans, and tax credits phase out for individuals earning more than $75,000 and couples earnings more than $150,000. The value of the credits ranges between $2,000 to $4,000 per individual, or up to $14,000 per family.

The bill promises to provide more flexibility for insurers to provide plans that offer varying levels of coverage, at different price points, and that could make it profitable for insurers. Insurers will still have to cover people with pre-existing conditions, and children under age 26 will be able to remain on their parents' plans.

Americans enrolled in Medicaid states that expanded enrollment criteria under Obamacare can still be covered under state programs, too -- with a caveat. The Federal government will provide financial support to Medicaid expansion states, but the amount will be fixed at a per-person figure after 2020.

However, it's unclear if the GOP's Medicaid plan will pass muster with republican members of Congress who represent expansion states. More than 10 million people have enrolled in Medicaid since Obamacare's passage, and as a result, republican lawmakers in expansion states are already telling republican leaders that they'll be scrutinizing the plan's Medicaid language carefully.

To help cover the cost of refundable tax credits, the bill keeps the Cadillac tax, and it allows insurers to increase premiums by 30% if someone doesn't continually maintain their coverage.

Looking forward

President Trump has said in the past that he wants an Obamacare replacement plan that's better, and ostensibly, that means cheaper, while still covering most Americans. The Congressional Budget Office should finish its evaluation of the GOP plan soon, and that should shed light on whether this plan delivers on those two goals. If it doesn't, then republicans may need to make some changes in order to get this bill passed.

Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.

Author

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.
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